Stocks fall on birthday of Nasdaq high

Weak economic outlook, war fears paint the Street red

NEW YORK (CBS.MW) -- Stocks collectively celebrated the three-year anniversary of the Nasdaq Composite's all-time high with a broad-based sell-off Monday, as fears of a renewed economic downturn provided a downward push.

Also, reports that North Korea test-fired another missile and Secretary of State Colin Powell's comment over the weekend that he was optimistic the U.S. would get the support needed to set a new deadline for Iraq acted as a chilling reminder that geo-political concerns continued to hang over the markets (read more).

The Nasdaq Composite
$COMPQ
which closed above 5,000 for the last time three years earlier, lost 26.92 points, or 2.1 percent, to 1,278.37 (See below for comments on strategists.)

"Investors are dealing with the same psychological block as they were three years ago," said State Street Global Advisors' chief investment strategist Ned Riley.

He said a war with Iraq would likely induce a rally, but believes doubts "will quickly return" to the equity markets. Listen to radio interview.

Ralph Acampora, chief technical strategist at Prudential Securities, said a close below support at 7,628 for the Dow, 806 for the S&P 500 and 1,261 for the Nasdaq would make a retest of the 2002 lows for those indexes "very likely."

All 30 of the Dow's components saw red. SBC Communications
SBC, +0.53%
paced the pack with a 5.6 percent slide, while fellow telecom firm AT&T
T, -1.02%
was second with a 4.1 percent drop.

Even an upgrade of chemical giant DuPont
DD, -1.19%
didn't help, as the stock eased 1.5 percent. See Ratings Game.

McDonald's
MCD, -1.86%
lost 2.5 percent and hit a low of $12.42, the lowest price seen since July 1993. SBC hit a 9-year low of $19.20.

In the broad market, decliners pummeled advancers by roughly 3 to 1 on both the NYSE and the Nasdaq exchange. Volume data was even worse, however.

Volume of declining issues on the NYSE was over 14 times up volume, while Nasdaq down volume led up volume by a more mild 3 to 1 margin.

Overall volume was a very light, with just over a billion shares trading on both exchanges.

J.P. Morgan economist Jim Glassman cut his U.S. gross domestic product growth forecast for the first half of 2003 to 1.5 percent from 3 percent due to evidence that the factory sector is "chilling" again and on his perception that labor demand may be weakening.

With concern over North Korea and Iraq continuing to build, the dollar extended its downward trek. The U.S. dollar was off to 116.82 yen while the euro rose 0.4 percent to $1.1054.

Underscoring not only the flight to safety, but also fears of renewed economic weakness after Friday's disappointing jobs data, a benchmark 10-year Treasury note rose 19/32 at 102 13/32, to yield
TNX, +0.41%
3.57 percent, down from 3.64 percent in the previous session (see Bond Report).

"Our concern now is outside the equity market," said Prudential's Acampora.

He said the "marcro indicators are very defensive," as the 10-year Treasury yield remains in a negative trend and the dollar downtrend remains in force.

Sector watch

The airline sector was among the day's weakest due to fears of impending war and its impact on travel and oil prices and to concerns over AMR's
AMR, +27.78%
financial position. The Amex Airline Index ($XAL) descended 4.6 percent, with AMR leading the way with a 14.2 percent decline after the company's pilots union said the timing of an AMR bankruptcy may be sooner rather that later. See airline sector story.

The wireless sector got a dose of good news when Qualcomm raised its phone chip shipment forecast to 28 million from 27 million, citing "steady progress" in global third generation code division multiple access (CDMA) network deployments. Qualcomm developed CDMA technology and receives royalties on its use.

In addition, research group Gartner Dataquest said mobile phone sales rose 6 percent in 2002 to a better-than-expected 423 million handsets.

Rising gold prices didn't help the companies that mined the precious metal, as witnessed by the 3.8 percent drop in the CBOE Gold Index
GOX, -0.56%
to a four month low (see Metals Stocks). Meanwhile, April gold futures surged $3.90 to $354.80.

Brokerage stocks also took a hit after Jefferies & Co. said there was "meaningful risk" to Wall Street's estimates for Charles Schwab
SC.H, +25.00%
sending the discount broker's stock down 4.1 percent. Also, Goldman Sachs
GS, -0.14%
gave up 3.5 percent after an article in Barron's over the weekend said the company may have to take a large charge related to its Spear Leeds & Kellogg trading unit (see Financial Stocks).

On a positive note, the outlook for independent refiners appears rosy after Lehman Bros. raised its rating on the sector to "positive" from "negative," citing the belief that the industry is at the early stage of a prolonged cyclical recovery which could last 18 to 24 months.

Among individual stocks, Fannie Mae
FNM, +2.52%
was slapped for a 6.9 percent loss after St. Louis Federal Reserve president William Poole highlighted risks to the company due to its low capital position. The government sponsored mortgage lender countered by saying there was nothing Poole said that he hadn't said in August 2002.

The company added that Poole ignored "key characteristics" of its regulatory structure, capital requirements and business approach.

General Electric
GE, -0.72%
was knocked 2.9 percent lower after the industrials conglomerate filed its annual report with the U.S. Securities and Exchange Commission late Friday. J.P. Morgan analyst Don MacDougall said there were no major surprises and that Chairman Jeff Immelt "did an excellent job" of highlighting the company's core strength.

MacDougall was "disappointed," however, that disclosure of GE's capital business "was not more forthcoming."

Happy birthday Nasdaq 5000

Three years ago Monday, the Nasdaq Composite reached an all-time high of 5,132.52 in intraday trading before closing at a high of 5,048.62.

The tech-burdened index was last trading about 75 percent below its all-time high. Since the end of 2002, it had lost 4 percent while the S&P 500 had fallen 7.8 percent.

SoundView Technology's Arnie Berman said volatility analysis suggests consensus is building that technology stocks offer greater reward potential, with less risk, than other market sectors.

He noted, however, that the seasonal recovery in technology spending and stocks "is already over."

Prudential's Edward Keon said he sees evidence of outperformance of growth and technology stocks and underperformance of high dividend yielding stocks.

"The better performance of tech stocks may be at least partially explained by an improved fundamental outlook, as evidenced by a small rise in consensus earnings forecasts over the past several weeks after a steep fall through most of 2002," Keon said in a note to clients.

RBC Dain Rauscher's technical analyst Bob Dickey said that while tech stocks may carry "negative feelings" among investors, they have already been beaten down substantially over the last three years and now appear to have the best potential to bounce and rally.

"At the very least, we believe that it is a very poor time to be selling techs in their generally bottoming trends," Dickey told clients.

Global markets

On the eve of the Nasdaq's infamous anniversary, Tokyo's benchmark Nikkei 225 Index fell below 8,000 overnight for the first time in 20 years (see Asia Markets) after the national TV broadcaster NHK reported that Pyongyang fired a ground-to-ship missile into the Sea of Japan, the second such incident in the past three weeks.

The Nikkei newspaper reported that the Bank of Japan was preparing to provide liquidity that is well above its current target level to stem the stock market's slide ahead of the Mar. 31 fiscal year end. The report added that the MOF was considering intervening in the currency markets with as much as 1 trillion yen a day ($8.6 billion) to help the export sector, which has been crippled by the continued rise in the yen.

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